Tax Tips for 2000

You still have six months to protect your holdings from Uncle Sam

to stash away $2,000 pretax,” he says.

Another IRA issue to consider is recharacterization. Here’s how it works. If you converted your traditional IRA to a Roth IRA (which means you have an adjusted gross income of $100,000 or less), you’ll pay tax on the balance based on your bracket because Roth IRAs are funded with after-tax money. If your holdings decrease in value, you can recharacterize the Roth back to a traditional IRA, then reconvert to a new Roth and pay taxes on the decreased holdings amount-thus cutting your total tax liability (see “5 Tax Changes in 2000″ for time limitations).

Donate appreciated assets to charity. “Both you and your charity can benefit if you give appreciated assets instead of selling the assets and donating the after-tax proceeds,” says Ed Fulbright, a CPA and financial advisor with Fulbright & Fulbright, Durham, N.C. (The other Fulbright is his wife, Genevia Gee.) The amount of savings can be significant, he says, depending on how much capital gains tax you would have paid on the sale.

For example, suppose you’re in the 36% bracket and plan to make a gift to your church of appreciated securities worth $100,000 that you paid $40,000 for. You must choose between giving the securities as a gift outright or selling the securities and giving the cash proceeds. The gift of stock allows you to take a full $100,000 charitable gift deduction and permanently avoid $12,000 of tax on the stock’s appreciation ($60,000 appreciation x 20% capital gains tax rate). If you sell the securities, you must pay the $12,000 capital gains tax, leaving you with just $88,000 in cash to donate to your church and a smaller deduction. By donating the appreciated stock, if you’re in the 36% bracket, you save $4,320. Keep in mind, however, that the maximum deduction you can take in any one year for charitable contributions is limited to 30% of your adjusted gross income.

Pay the proper amount of 2000 estimated tax to avoid a penalty. The easiest way to ensure you do so is through the “safe harbor” known as the 100% rule. “If you use the 100% rule, look at your total tax obligation for the prior year,” says Broussard. “Take the information from the line that says total tax, divide it by four and mail in that amount each quarter.” However, if your adjusted gross income for 1999 exceeded $150,000 (or $75,000 for married taxpayers filing separately), “If you want to use the safe harbor, you have to pay 108.6% of your 1999 taxes in estimated payments,” she says.

According to Broussard, two other safe harbors are available. The first keeps you penalty-free as long as you pay at least 90% of what your eventual tax obligation will be. Under the second, if you’ll earn less in 2000 than you did in 1999, and you mail in estimated tax but it’s not enough, as long as the discrepancy is less than $1,000, the underpayment penalty won’t apply.

Plan for your children’s college education.

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